Wall Street is getting ready to start trading water futures contracts. We have heard how water shortages have been affecting several regions around the world. Moreover, analysts believe that by 2050 the situation could only get worse.
This is why Wall Street decided to start offering water futures contracts for traders. Users will be able to speculate with the price of water. This is the first time that Wall Street offers water future contracts. The information was released by the CME Group a few days ago.
Does that mean that you will be able to buy a “water share”? Well, things look a little different. Let us share this with you.
What are Futures Contracts?
Futures contracts represent agreements to buy or sell an asset at an arranged price and date in the future. Due to the volatility in the price of commodities, futures contracts are a way to reduce uncertainty for companies. Oil and other precious metals like gold have futures contracts that can be purchased.
Futures contracts have also reached the cryptocurrency market a few years ago. This is why traders can now enjoy margin trading, leverage and many other solutions related to them.
What are Water Futures Contracts?
Water futures contracts allow traders to buy or sell water at a specific time in the future for a pre-determined price. This is why the Chicago Mercantile Exchange (CME) is getting ready to offer users water futures contracts.
The contracts that are going to be sold represent 10 acre-feet of water. Another way to think of it is the water necessary to cover an acre of land with one foot of water.
According to Tim McCourt, the head of equity index and alternative investment products at the CME, water scarcity is going to be a growing risk for many individuals around the world. He mentioned that around 66% of the world population could face water shortages in just 5 years from now.
About it, he stated:
“With nearly two-thirds of the world’s population expected to face water shortages by 2025, water scarcity presents a growing risk for businesses and communities around the world.”
With these new water futures contracts, it will be possible for companies, investors and farmers to hedge against water shortages. Moreover, they can also be used by investors in order to speculate on the price of the asset moving higher in the coming years.
Users can now have access to a larger list of commodities to trade. They can now handle Oil, Water and precious metals, among others. It is also taking into consideration that these water contracts are going to be financially settled rather than physically settled.
Regarding prices, it is worth noting that they are tied to the Nasdaq Veles California Water Index. This index was launched a few years ago and it follows California’s water markets.
Understanding the price of water following the California market might lead to overprices if we compare it with the spot market. When we talk about the spot market we are making reference to the water we can buy in stores or supermarkets.
Understanding the Investment
According to Business Insider, Michael Burry is one of those high-profile investors that is looking to invest in water futures contracts. In recent years, he has been searching for a wide range of investments related to life-sustaining solutions. He considers that demand for resources continues to grow as the population expands and also due to climate change.
Furthermore, it is worth taking into consideration that farmers are also going to be using water contracts to hedge against possible future water shortages. This could help them reduce costs and uncertainty as climate change continues to hit California and the entire world.
The official announcement of the water futures contracts was made by the CME Group some months ago. The company focused on the challenges that societies around the world are currently facing. Moreover, they shared the need to have a tool to reduce exposure to the risks related to the water market.
Additionally, the water futures contracts would be focused on California. The U.S. State has been affected by record-high temperatures in recent years. This has affected wildlife, farmers and the lives of thousands of individuals. In order to reduce this uncertainty and financial losses, water futures trading could become a helpful investment tool for those industries that are highly dependent on a constant supply of cheap and good quality water.
